Fundraising conditions are challenging, but that is not stopping PPHE Hotel Group, the Amsterdam-based hospitality real estate company, from trying to raise €125 million from institutional investors for its first private investment fund.
Together with €75 million already committed by cornerstone investor Tel Aviv-based Clal Insurance, and €50 million committed from PPHE’s own balance sheet, the company hopes to reach a €250 million target within 12 months.
The firm received regulatory approval for the closed-end European Hospitality Real Estate Fund. Plans to use leverage at a loan-to-value ratio of 50 percent will take the fund’s full investment capability to €500 million.
Daniel Kos, the company’s chief financial officer and executive director, tells PERE the decision to establish the private vehicle originated during the pandemic: “We thought there was going to be a lot of distress in the market, so we tried to seed and raise a fund.”
“Obviously there were multiple waves of covid, so a lot of investors were still doubtful of investing amid the turmoil, so we put it on a low fire. Last year when everything started to go back to normal, we kickstarted the project again and it really took off at the end of 2022.”
PPHE, which has owned and developed hospitality real estate since 1989, has a £2 billion portfolio, and operates its hotels and resorts through brands including Park Plaza, through a perpetual license from the Radisson Hotel Group, and art’otel.
“We have a 30-year track record. We know what we’re doing. We’ve always done it for ourselves and we think it’s the ideal moment now to explore this further in a fund,” says Kos.
Consistent with PPHE’s existing strategy, the firm is targeting a 15 percent gross IRR and will invest the fund’s capital in outdated assets, development plots or family-run businesses in need of value-add. But where PPHE has historically invested on a buy-and-hold basis using balance sheet capital, extracting excess value only, the fund will use bank financing and has a seven-year exit strategy. “If we put our €50 million into play, instead of buying one or two assets, we can now have a more diverse exposure to about 10 hotels. It’s also a way of recycling our capital and growing it that way,” says Kos.
“We have proven ourselves already on the London Stock Exchange to our listed company investors, and now we have to do the same with our fund investors. I’m sure if we are successful that more will follow. It’s an opportunity to accelerate our own growth.”
Reflecting the impact of the pandemic on travel, tourism and hospitality, PPHE Group’s share price fell off a cliff in March 2020, and has yet to recover to pre-covid levels.
Diversifying capital
PPHE’s maiden fund launch comes at a time of heightened interest among publicly listed real estate companies in exploring the private equity fund model. Damien Smith, managing partner of the strategic advisory practice at advisor Sera Global, which is co-headquartered in New York and London, tells PERE he is seeing more public companies in both Europe and North America looking at options to attract private capital.
“In many ways, they see it not only as a more efficient way of generating returns relative to the risk profile, but also as a way to access capital that can be complementary to their public market capital,” he says. “They are looking at the potential new capital sources and asking, are we missing something here?”
Smith notes that real estate investment trusts, in particular, are becoming more proactive at pursuing these opportunities, “not just in a tactical fashion such as one-off joint ventures, but as part of their long-term strategic planning.”
“Although there are a number of extremely high-quality REIT managers, we are finding that there is a lack of understanding and quite a bit of work required to prepare them for the specific requirements of private capital investors. This is where expert advice is critical to assist REITs in navigating these options in today’s challenging market environment.”
Some public real estate companies have recently hit the headlines for their efforts to draw capital from the private sector by other means. At the end of April, German listed giant Vonovia sold a 30 percent stake in a portfolio of residential assets to New York-based manager Apollo Global Management. The REIT, which has struggled with declining performance over the past year, was looking to generate €2 billion by the end of the year and secured half of that amount in the transaction.
Just over a week later, New York-based CBRE Investment Management announced it had exchanged contracts to acquire another portfolio of five multifamily residential assets located across Germany from Vonovia, for a sum of €560 million.
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